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A Race against the Clock to Address TRIA Issues

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Failure by the Senate to reauthorize the Terrorism Risk Insurance Act (TRIA) has left unanswered questions for insurance buyers facing renewals on terrorism coverage—which some in the insurance industry are scrambling to answer.

Because TRIA renewal was recently passed by a majority in the House of Representatives, the industry was optimistic about its renewal before its expiration. But at this point, the Dec. 31 deadline looms large.

AIR-Worldwide explained in an email notice that commercial insurers will no longer be required to offer terrorism coverage beginning Jan. 1. Without a federal backstop, they said, insurers may seek to limit underwriting for high concentrations of risks in major cities. This could cause terrorism insurance coverage to become unavailable or unaffordable.

AIR continued:

Insurers that do continue to offer commercial terrorism insurance would likely be required to maintain higher capital standards in order to avoid negative rating implications. Where coverage for terrorism-related events is still available, prices for this coverage will increase.

In the absence of TRIA, the workers’ compensation insurance market would be particularly vulnerable to terror attack losses. State workers compensation statutes offer insurers less flexibility to control terrorism risk through modifications such as policy limits or coverage exclusions. With or without TRIA, it is mandatory for U.S. employers to provide workers’ compensation coverage. If coverage is not available, employers may be forced to purchase insurance in the residual markets or self-insure.

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This could result in large amounts of risk being transferred to the residual market in a few states.

Allowing TRIA to expire would have widespread implications, not only for the insurance industry, but also for the broader economy. Construction and real estate business sectors may be unable to obtain financing without adequate terrorism coverage in place. If insurers limit underwriting following an expiration of TRIA, businesses with high concentrations of employees could have difficulty obtaining coverage for workers’ compensation, including higher education institutions, hotels, airports, hospitals, and financial services, among many others.

In an advisory to its clients, Willis addressed considerations and offered preliminary guidance.

The broker noted several scenarios, depending on how a company has organized its terrorism risk transfer program:

• For terrorism coverage that is currently embedded in all-risk property, liability and workers compensation programs there are three potential scenarios:

1. If there are no sunset clauses–contract provisions which may allow the insurer to exclude coverage for terrorism in the event that TRIA is not reauthorized–or reservation of rights clauses related to TRIA expiration, the program will run until its natural expiration. Market disruption may impact renewal pricing if no action has been taken on TRIA.

2. If there is a TRIA-related sunset clause, the terrorism coverage will expire after Dec.

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31. Policyholders should assess the need for insurance coverage and seek stand-alone coverage or a sunset clause extension.

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3. If there is a reservation of rights which allows carriers to modify the terrorism coverage as a result of TRIA expiration, a coverage extension should be negotiated if possible, and stand-alone alternatives should be sought.

• Stand-alone Terrorism coverage – In this case, Willis said it does not anticipate immediate changes due to TRIA’s expiration. This is because most stand-alone placements do not have sunset clauses or reservation of rights endorsements related to TRIA expiration. While there may be market disruption to consider at renewal, for the time being, TRIA is a non-issue for these placements.

• Captives – In all cases where it places terrorism reinsurance behind a captive program, Willis said the reinsurance arrangement this year has been organized to convert from quota share reinsurance of the captive—when a primary insurer and reinsurer establish a fixed percentage for sharing amounts of insurance, premiums and losses—to primary reinsurance of the captive (in anticipation of TRIA’s expiration). Reinsurance coverage agreements should be read carefully to determine the new limit. The new primary limits are likely to approximate their existing quota share capacity. Willis recommends that any capacity that does convert should remain as reinsurance of the captive. This would maintain captive involvement, should TRIA be reauthorized in early 2015, and avoid any direct self-procurement or frictional costs during the transition. A program may also include excess capacity which, in many cases, should drop down to provide excess over revised captive limits, Willis advised.

Digital Presence May Improve Critical Customer Satisfaction for Insurers

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With data from 15,000 customers and over 100 insurance executives, consulting firm Capgemini and Efma found that enhancing customer experiences directly impacted insurers’ profitability. “Given the increasing demand of internet and mobile channels in insurance, digital transformation is an effective approach to create positive experiences, secure customer loyalty, and ultimately improve insurers’ profitability,” the report states.

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While many insurers say they are working to improve the user experience, ratings have only increased by about 2% worldwide, with only 32% saying they had positive experiences with their provider.

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Further, nearly 70% of customers reported that they are considering switching carriers.

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Digital presence is increasingly important in making customers happy, according to the study. For example, while internet-mobile is the least likely channel to offer a good experience, it has the greatest impact when successful.

Overall, as Capgemini and the MIT Center for Digital Business found in 2012, firms with a strong digital presence and customer focus are 26% more profitable.

In addition to the new report, Capgemini released the following infographic with their findings:

World Insurance Report 2014 Infographic

Industry Submits Comments on International Tax Reform

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On November 19, 2013 the Senate Finance Committee released its proposals for reforming the United States international tax system with the goal of making U.S. businesses more competitive. One of the provisions included in the draft was the reinsurance tax, commonly referred to as the “Neal Bill.” This provision, introduced in the past few legislative sessions by Rep. Richard Neal (D-MA) and Sen. Robert Menendez (D-NJ), would disallow an income deduction for reinsurance premiums paid by an U.S. insurer to an affiliated reinsurer if the reinsurer is not subject to U.S. federal income tax on the reinsurance premiums. Over the past few weeks, several groups have taken the opportunity to comment on the committee’s draft, and specifically the inclusion of the Neal Bill language.

Upon release of the discussion draft, the Coalition for Competitive Insurance Rates (CCIR) expressed its opposition to the inclusion of the Neal Bill provisions. “The decision by Sen. Max Baucus (D-MT) to include this provision in the Finance Committee’s draft ignores warnings from elected officials, state insurance commissioners, trade experts and consumer advocates that this tax would drive up the cost of insurance to homeowners and small businesses.”

Many members of CCIR, including RIMS, also took the opportunity to express their opposition to the tax. In a December letter filed with the Senate Finance Committee, RIMS President John Phelps stated RIMS opposition to the draft because of the “demonstrable negative implications for the global reinsurance market and the United States businesses that rely on this market. The current system allows companies to cede reinsurance, freeing capital to provide more insurance to domestic consumers and thus maintain reasonable premiums.”

Allianz of America, Munich and Swiss Re filed a joint letter stating the reinsurance provisions would “disrupt essential risk distribution practices followed by domestic and foreign insurers, alike; increase premiums and reduce coverage available to U.S. consumers, particularly in catastrophe prone areas along the coastlines.”

James Donelon, Louisiana commissioner of insurance has stated that the discussion draft “could ultimately result in citizens in disaster-prone states like Louisiana being faced with higher premiums for their property insurance.”

Bill Newton, executive director of the Florida Consumer Action Network, expressed similar sentiments. “By increasing taxes on foreign-based reinsurers, consumers would face lower insurance capacity, diminished competition in the insurance market and, most importantly, higher prices. These measures are counterproductive to the job of revitalizing and strengthening the American economy. Ultimately, the cost of increased taxes will not fall on the foreign based reinsurers, but instead on consumers and businesses in Florida and other states.”

While, many continue to oppose the Neal Bill provisions there is one group supportive of the measure. The Coalition for a Domestic Insurance Industry, led by W.R. Berkley Corp., Travelers and Chubb, has consistently supported similar legislation in the past. In a May 21 statement, William R. Berkley, in reference to the re-introduction of the Neal Bill legislation, stated that “closing unintended loopholes to recover lost revenue is one of the best ways to offset the cost of needed tax reform. Closing this loophole, staunching the flow of capital overseas, and restoring competitiveness for this important domestic industry is a win for all.”

TRIA Will be Renewed, P-C Panel Agrees

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Photo by Don Pollard

NEW YORK—Insurance industry experts in a panel discussion agreed that while terrorism risks are changing, they believe the Terrorism Risk Insurance Act (TRIA), set to expire Dec. 31, 2014, will be reauthorized by Congress. In fact, a poll taken at the annual Property/Casualty Insurance Joint Industry Forum found that 93% of attendees believe TRIA will be renewed.

“In the U.S., we’re moving away from the risk of catastrophic-scale terrorism. But we are probably more likely to have the Boston Marathon type of terrorism,” said Stephen Flynn, professor of political science and founding director of the Center for Resilience Studies at Northeastern University in Boston.

The reasons are that, “The know-how to carry out these low-end acts is pervasive and the opportunities for this type of terrorism are relatively high. Because they can be conducted on a small scale, they are difficult to plan for in advance and intercept,” he explained, adding, “In my mind there is no question that the feds need to play a backstop role. This isn’t a natural market. It’s not a natural disaster environment. The role an industry can play in educating about risk and engaging mitigation measures is a very useful public policy outcome of the feds playing a role as a backstop.”

The six-member panel was moderated by Julie Rochman, president and CEO of the Insurance Institute for Business & Home Safety.

Robert H. Easton,executive deputy superintendent of the insurance division at the New York Department of Financial Services [pictured above with John Huff, director of the Missouri Department of Insurance] said, “We would like to see TRIA in some form become permanent so we don’t have to have this discussion every few years.”

Easton added, “The political reality is that this is unlikely to occur, but our view is that if anybody should be taking one of the more extreme views it is New York. The program has been critical to insuring that there is sufficient capacity in the marketplace.”

Huff agreed that it needs to be renewed, but noted that TRIA should not be a “big state, small state issue.” Rather it should be supported by states of all sizes. “Missouri has a significant urban, suburban and rural presence,” he said.

Jay Gelb, managing director and senior equity analyst for Barclays believes TRIA will be reauthorized at the last minute. If reauthorization doesn’t happen, “It would be concerning from an investment viewpoint,” however, “Insurers could underwrite the exposure or limit their concentrations in target areas, especially in lines where losses cannot be excluded, such as workers compensation.”

Matthew Mosher, senior vice president and chief rating officer for the A.M. Best Company observed that while insurers can, indeed, manage the risk of terrorism, and even avoid it, “what does that do for the nation as a whole? When you look at the impact of TRIA, it comes down to how much risk you want individuals to absorb. At this point insurers are not able to provide a large amount of coverage without a backstop.”

In terms of adjustments to the program, Easton said, “We would like to see the inclusion of cyber as a risk that TRIA addresses. The cyber world is very different today than even 12 or 13 years ago.”

For the poll questions and full survey results, go to 2014 Property/Casualty Insurance Joint Industry Forum Questionnaire.